Is your business sale ready? A five-step way to find out

Most business owners think about selling in terms of numbers, such as how much the business is worth, and when it can reach that figure. But long before prospective buyers look at accounts, they’re forming a view on something much harder to quantify: whether the business, and its owner, are truly ready for sale.

In this guide, Price Bailey’s SCF advisers outline five areas owners can assess to determine whether their business is sale ready. Where it is not, the assessment can help identify the gaps and areas of work needed well ahead of a future exit.

Step one: Identify the shareholder’s desired outcome

Before anything else, work out what result you want for you, not what you think should want, and not what a friend achieved when they sold their business.

This matters significantly more with owner-managed businesses than the deal value alone suggests, because the answer is usually more than just money. It’s a combination of value, conditionality, ongoing role and timing, and all four shape who will potentially buy the business and how the deal is structured.

A surprising number of owners go into a sale process without a clear answer, get approached, and end up agreeing to a deal dictated by someone else’s agenda rather than their own. The result can be seller’s remorse: feeling pushed into a transaction that never matched what they wanted.

The questions worth considering early are:

• Do you want to walk away on day one, or are you prepared to stay involved for a period after the deal completes? If so, how long are you happy to work for someone else rather than yourself?
• What do you want life to look like after the sale, beyond the headline value?
• Do you want to provide for children, or the next generation, from the proceeds?
• Is there anyone in the business, such as a managing director or long-serving employees, you want to look after as part of the deal?

Most sellers are asked to stay involved with the business, often part-time, for two to three years after completion, and part of the deal value is usually tied to that ongoing involvement. The more responsibility you’ve already passed onto a second layer of management, the less value needs to be attached to you personally staying.

Timing on legacy planning is equally important. Owners who only start thinking about looking after key people in the final months before a sale are usually limited to paying bonuses, which can be tax inefficient. Owners who plan a few years ahead have more options, such as a share option scheme put in place well before a sale.

Getting clarity on these details is not only good practice, but directly influences the type of buyer you’ll be selling to, which leads into the next question.

Step three: Identify what drives your value

Owner-managed businesses are often valued using a multiple of historic earnings, particularly where reliable forecasts are unavailable. However, buyers are ultimately investing in the business’s future performance, not simply what it has achieved in the past.

A question to consider is: how strong and predictable are earnings going forward? And are they increasing or declining? Recurring revenue is a strong indicator that earnings are of higher quality, and this can come in several forms, including:

• Customers with a strong pattern of repeat business.
• Long-term contracts, or subscription-style agreements.
• Annual service contracts, such as a business that services equipment under yearly repeat agreements.
• Technology, specialist facilities, or other intellectual property that creates stickiness, making it harder for customers to switch away.

On the other hand, several factors weaken quality of earnings, including heavy reliance on a small number of customers, where losing just one could materially affect revenue, contracts approaching renewal that haven’t yet been secured, and products or services with a limited shelf life, where market change puts future demand at risk.

It also helps to understand that value builds in layers, not as a single multiple. The diagram below shows how those layers stack, and where you can act to move up them. Financial performance forms the base. Above it sit your growth prospects, then the technology and intellectual property that make you hard to replace, then the synergies a particular buyer could realise by combining your business with theirs. At the very top sits a strategic premium, which only applies where a buyer needs your business specifically, not just a business like it.

The further up that stack you can credibly reach, the more your business is worth beyond a straightforward earnings multiple, and competitive tension between buyers is what pulls value up through the layers.

Step five: Build the plan for the end game

A good end-game plan covers the entire business, and often personal or family matters. It should address risk and how to mitigate it, as well as setting out how you’ll measure progress. In practice, that plan tends to cover the same handful of areas, whatever the business.

Management: Build a team that reduces the business’s reliance on you personally. That means having a management team in place who can carry the business forward, and being able to show, ahead of a sale, that you’re already stepping back. That could be as simple as reducing your working days in the run-up to a deal, so buyers can see the business performs without your day-to-day involvement. Buyers won’t acquire a business that risks failing the moment the owner leaves, and this kind of change takes time to embed convincingly. It isn’t something you can demonstrate credibly in the final few weeks before a sale.

Management information: Buyers don’t just want to understand your trade, they want to see the operational backbone behind it, and owner-managed businesses often underinvest here, running the business on instinct rather than data. When a buyer expects monthly management accounts broken down by product and region, but the business only produces figures quarterly or annually, due diligence can stretch by weeks or months while the business reconstructs that detail after the event. Not only does poor information slow a deal down, but it can hit value or kill the deal completely.

Tax: Tax is usually the biggest cost of any deal, so getting advice early is one of the most effective ways to mitigate it. It’s also the area where a corporate structure gets tested.

Cash, debt, and working capital: The final sale price gets adjusted for the business’s surplus cash, debt, and working capital.  This adjustment can be significant. Reducing your working capital cycle ahead of a sale helps maximise the cash you walk away with, on top of the headline price.

Operational issues and skeletons: Tax history, litigation, contract renewals, and capital expenditure requirements all get reviewed closely during due diligence, and any outstanding issues need dealing with before they deter buyers or create future liabilities. Failure to do so can delay deals by several months or stop them from proceeding all together.

The common thread that runs through all of this is honesty. A common misconception is that deals fail because of a problem itself; in reality, they fail when a buyer discovers a problem late in the process and begins to wonder what else hasn’t been disclosed. So, being open about known issues, and framing them fairly, keeps a deal moving.

Right deal team: None of the above works well without the right people around you. Assemble an experienced deal team you trust to give you the best advice, even when it challenges your own thinking, and do it as early as possible. The longer you’ve had proper legal, tax, and corporate finance advice in place before going to market, the more prepared you’ll be across every part of the process, and the more flexibility you’ll have when things need to change.